Wednesday, November 12, 2014

IMF and US Establishment Still Worried about Deflation

We have already posted links to several articles here noting how concerned western financial institutions are about possible deflation in the global economy. Even though no such deflation has been recorded in officially reported statistics, we still get warning after warning about it. This article confirms the fear is still there. US and IMF officials are pushing hard for looser monetary policy in Europe and Japan as well as increased government spending everywhere to "promote growth". Some quotes and comments below. Readers should read all articles linked in full to get context.

"The International Monetary Fund and the United States encouraged the European Central Bank and the Bank of Japan toward greater monetary stimulus on Friday and urged governments around the world to do their share to cultivate growth in their countries."

"Calling the world economy "fragile, brittle and fragmented", IMF Managing Director Christine Lagarde told a conference of central bankers in Paris it was "perfectly legitimate and appropriate" for the ECB and the BoJ to take unconventional steps to combat low inflation and economic stagnation."

"US Federal Reserve Chair Janet Yellen said central banks "need to be prepared to employ all available tools, including unconventional policies, to support economic growth and reach their inflation targets," especially where governments have withdrawn fiscal stimulus."

"Lagarde said governments with healthy budget positions should do more to support growth, describing as insufficient a German announcement of an extra 10 billion euros in spending on public infrastructure over the next three years."

"In this part of the world, we have to repeat over and over that monetary policy cannot be the only game in town, and that there has to be a combination of sound fiscal policies, use of fiscal space for those countries that have fiscal space in order to support growth and rejuvenate that growth," she said.

"Clearly, the announcement that was made yesterday was in the very small ballpark of what will be needed in order to do that."

"Mohamed El-Erian, an economic adviser to German insurer Allianz and former co-chief of bond giant Pimco, said central bankers should not underestimate the risk of currency market swings as their monetary policies take divergent paths."

"As much as these currency moves may contribute to global rebalancing on paper, I would just caution from a market perspective not to underestimate ... the speed and size of currency moves," he said.

Then we have this article appearing on the Bretton Woods Committe web site calling on the ECB to ignore Germany and ramp up more monetary stimulus in Europe. It seems that driving inflation rates higher has now become the primary objective for western Central Bankers and the IMF. Below are some quotes from this article.
"THE CONTRAST between the monetary policies pursued in America and the euro zone since 2012 could not be greater. Since 2012 the Fed has continued to expand its balance sheet dramatically. From 2012 to 2014 the Fed added $1 trillion to its balance sheet. In doing so, it increased the American money base (liquidity) by approximately the same amount."
"Exactly the opposite occurred in the euro zone. After having expanded its balance sheet during the period 2008-11, pretty much as the Fed had done, the ECB started a period of dramatic contraction in its balance sheet (and thus in the euro money base) from 2012 onwards. As a result, in 2014 the ECB had reduced the money base by €1 trillion. This was the period during which the Fed added $1 trillion to the money base, an increase of 25%."
"There can be little doubt that the decision of the ECB to reduce the money base by 30% at a time when the euro zone had not recovered from the sovereign-debt crisis contributed to pushing the euro zone into a deflationary dynamic, out of which it still tries to extricate itself."
"The question that arises now is what the ECB should do. At a minimum it should take its responsibility of keeping inflation close to 2% seriously. For two years it has failed to reach this objective. The only way to reach it is to increase the money base and the only practical instrument that can be used to achieve this goal is a purchase of government bonds. This is standard economics. The ECB should recognise this and should not be distracted by non-scientific objections to the use of that instrument."
My comments: 

From the above we see that worry about low inflation/deflation is very high at the IMF and in the US elite banking circles. Falling oil and commodity prices along with signs the US housing market may be starting to roll over could be signals being watched. The recent sharp stock market selloff might be another signal. A reasonable question to ask might be, Why so much worry about low inflation? Isn't that a good thing?

The answer is probably that these officials are seeing that the US "recovery" is very weak at best (and perhaps about to get weaker) despite trillions in attempted stimulus. Add in the fact that the Fed is now going to pull back on stimulus in the US. There is clear concern as to what will happen to the US economy as that happens. Note in the article above the warning from Mohamed El-Erian (former Pimco) that officials should not underestimate the potential "size and speed of currency moves" from all this monetary policy change around the world. 

All we can do here is keep informing readers of these warnings and statements of concern being issued constantly. So far, things have held together and they have avoided a "trigger" event that starts another major crisis. But clearly, they are quite concerned that one could happen at any time despite all efforts to avoid it. It is why we have to keep watch all the time in the world we live in today.

Added note:  Here is an interesting article by Alasidair Macleod on this whole issue.

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